USA Compression Partners LP

And welcome to the USA Compression Partners First Quarter Earnings Conference call. Today's conference is being recorded. At this time, I would like to turn the presentation over to Mr. Chris Porter. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended December 31, 2020. You can find our earnings release as well as recording of this call in the investor relations section of our website at usacompression.com. The recording will be available through February 26, 2021. During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release. As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today, February 16th, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning we released our financial and operational results for the fourth quarter of 2020, which wrapped up a year marked by unprecedented volatility in the energy markets and considerable uncertainty throughout the broader economy. Almost 11 months ago when the world was seemingly turned on its head overnight, none of us knew what the rest of the year would look like, let alone the next few days or weeks. As we worked through the summer and into the fall, we started to see more stability in our marketplace, And I'm pleased to report the USA Compression's business model, focused on large horsepower natural gas compression services, fared well as the natural gas demand in the US showed resilience throughout the year and as exports rebounded toward the end of the year. This demonstrated the critical role of natural gas plays in our economy. With some of the uncertainty from 2020 behind us, including the COVID vaccine development and the US presidential election, We are cautiously optimistic that the worst is behind us as the country and the world gets back to work and what we all hope are more normal times ahead. The relative attractive macro environment for natural gas that started in the back half of 2020 has continued into the start of 2021, and sentiment from our customers is positive. While there is still work to do to gradually get our business back to where it was pre-pandemic, we are encouraged by signs of activity and the overall resilience of natural gas demand in this country and abroad. While the current cycle was unlike any other, with multiple macro factors affecting our industry and volatility and commodity prices, which had never been seen before, we approached it with a similar mindset as previous cycles. Over the course of our 20-plus year existence, we've never changed our primary focus on large horsepower compression used in large, regional, infrastructure-oriented facilities. Our business model has powered through previous cycles, and as we start to see the green shoots of this cycle, we have again relied on the stability of natural gas demand, our customers, and the demand-driven critical applications which our assets serve. We believe our business is differentiated from other service providers, whether compression, oil field service providers, or even some midstream operators. And while we have seen a modest decrease in utilization, because of our focus on the large horsepower segment, we have fortunately been spared much of the pain that others have suffered over the past year. As we get closer to what we all hope is the end of the COVID public health pandemic, I'd like to recognize our dedicated and hardworking employees, as well as those across the energy industry who have worked nonstop to ensure that our country has the energy it needs to get back going and prosper. While COVID has presented some unique challenges to most businesses throughout the country, I'm proud of the dedication by our entire team to do their job safely and efficiently. Recently, the Office of Management and Budget released a statement that indicated it expected the economy to grow at record levels and by mid-2021 to be at levels of growth greater than pre-pandemic. In order to make that happen, natural gas will be required to generate power, fuel industrial feedstock and manufacturing, as well as serve as a critical source of fuel in many parts of the world. Our view is that the importance of natural gas is often understated and misunderstood by many, and we believe the years to come will prove that out. Turning to the fourth quarter, we experienced a modest quarter-over-quarter decline in both revenue and average horsepower utilization. As we worked through some unit returns for the quarter, our active horsepower out in the field fell a mere 1% from third quarter levels. While on an absolute dollar basis, adjusted gross margin and adjusted EBITDA reflected a decrease from the third quarter's levels, both adjusted gross margin percentage and adjusted EBITDA percentage remained at levels consistent with our historical performance. Keeping both adjusted gross margin and adjusted EBITDA percentages at our same historical levels in this environment is not to be overlooked. Total revenues were 158 million, approximately 2% below Q3. By keeping a close eye on cost, we achieved adjusted EBITDA for the fourth quarter of approximately $98 million. As I mentioned, we delivered attractive operating margins in line with historical USA compression averages, with adjusted gross margin and adjusted EBITDA margin of 68.4% and 62.1% respectively. Average utilization throughout the quarter was 83%, down just slightly from the Q3 level of 83.9%. After living through the middle part of 2020, seeing utilization essentially stay flat for the quarter was a positive sign, and we're cautiously optimistic that the worst is behind us. During the quarter, with some continued uncertainty, certain of our customers continued to evaluate their overall compression needs, especially as they worked through the primary budget season and looked ahead to 2021. We ended the fourth quarter with approximately 3 million active horsepower, which is off less than 1% from the previous quarter end, while the total fleet remained consistent at about 3.7 million horsepower. To compare where we sit today versus 12 months ago, utilization is down about 11 percentage points. While a slightly larger magnitude than in the 2014-2016 downturn, you have to remember and appreciate the condensed timeframe in which 2020's downturn played out. We have chosen a different strategy than some of our peers who have opted to maintain utilization while suffering margin degradation. Our view, which is consistent with what we did in past downturns, is that in a capital constrained and leverage limited environment, equipment will be in short supply when commodity prices improve and customer activity picks up. which will allow USA Compression to deploy our idle assets with improved economics. Average pricing across the fleet decreased about one-half of 1% during the fourth quarter, limited by very modest unit returns and working off the impact of temporary service rate adjustments. We only have a few contracts still operating under those reduced temporary service rate adjustments. average monthly revenue of $16.55 per horsepower was down slightly from $16.62 in the third quarter. The end of the year is usually a slower time for capital expenditures, and during the quarter, our growth spending decreased approximately 30% from third quarter levels to 10.9 million, maintenance capex of 5.4 million was slightly above the third quarter, but as you can all appreciate, maintenance capital tends to be rateable throughout the year, and is important to keeping our fleet running. The small amount of growth capex for the quarter primarily consisted of the delivery of three new large horsepower units, which were contracted for and began service in West Texas upon completion. Based on the fourth quarter's results, the Board decided to keep the distribution consistent at 52.5 cents per unit, which resulted in a distributable cash flow coverage ratio of .99 times. Our bank covenant leverage ratio was 5.03 times for the quarter. Consistent with prior quarters, our board of directors determines a quarterly distribution on a quarterly basis, and the board can opt to maintain, reduce, or suspend the distribution as it deems most appropriate. Turning now to the broader energy markets, I think 2020 demonstrated not only the potential volatility of the energy markets, but also the importance of energy to our daily lives. While the price of crude oil averaged about $40 for the entire year, in between, we hit highs of about $63 a barrel and never seen before lows of negative $37 a barrel. And in between, we heard dire predictions of tremendous global and domestic domain destruction, both with regards to crude oil as well as natural gas. The industry took quick action to reduce CapEx budgets and re-gear business models for an environment potentially marked by low demand, excess supply, and uncertain recovery timing and duration. Drilling was slowed or stopped. In some cases, existing production was curtailed and the industry waited to see what was going to happen. There's an old saying in our industry that the best cure for low prices is low prices. And what we witnessed throughout the back half of 2020 shows exactly how tightly wound supply and demand in the global energy industry is. The demand came back much more quickly than many expected, driven by the reopening of economies, but also the base load demand, particularly for natural gas, never went away. This helped get inventories back in check, and pretty soon we saw stabilization in commodity prices, which we experienced over the course of the last two quarters. As the impact of the slowdown in drilling activity began to show, we saw commodity prices climb higher. At the end of 2020, crude was nearing $50 a barrel. Natural gas was around $2.40 for MMBTU. Since that time, NYMEX crude is up right around $60 a barrel and natural gas has reached $3 per MMBTU. The latest numbers from the EIA estimate total U.S. production of natural gas in 2020 was down less than 2% from 2019 levels. The resiliency of demand for natural gas in this country for power generation and industrial manufacturing, not to mention the demand for exports to other areas of the globe, has driven USA compression business throughout its entire existence, and 2020 was no different. With the recent polar vortex and frigid temperatures across the middle of America and the East Coast, 2021 demand for natural gas is starting off with a bang. We clearly experience the impact of commodity volatility and demand uncertainty on our business, and you see that in our modest utilization impact. As we keep a close eye on the activity levels in the various areas in which we operate, we are seeing positive signs which we expect will bode well for our business. For example, take associated gas production in the Permian Basin. Last spring, as E&P laid down rigs, there was a lot of uncertainty over what the impact on gas volumes of the region would look like. Well, the EIA reported that between December 2019 and December 2020, natural gas volumes out of that region were actually up 1.6%. May represented a low point, which was off 10% versus December 2019, before volumes ticked back up to pre-pandemic levels. You are seeing resilient demand drive these volumes, and ample takeaway and processing capacity in the Permian and Delaware basins has allowed producers to sell into a functioning natural gas market. No longer are you entirely dependent on crude oil economics, which has helped many operators work through 2020 and be in a decent position as 2021 has begun. On last quarter's call, I spoke about global crude oil inventories and the ever-changing dynamics. My point was that the U.S. is an important region for crude oil storage. The statistics proved tightening supply demand and that inventories were close to getting back to pre-COVID levels. Remember, it was the perceived glut of oil supply and lack of storage that in part led to the negative crude oil prices. We continue to see draws of crude oil from storage and are approaching more normalized storage levels. For January, Global oil and storage actually declined by nearly 29 million barrels, the sixth consecutive month in a row that storages have fallen. To put this inventory decline in perspective, we usually see a storage build in January of about 31 million barrels. Supply and demand fundamentals appear to be coming into equilibrium and setting up a much improved scenario in the future. With demand coming back on, OPEC Plus showing restraint, and shale well production declining, this should all add up to a positive environment for crude oil, which should have positive effects on the associated natural gas markets. While we expect capital budgets to continue to impact production growth across all the basins in which we operate, the steady move upward in commodity prices has burned some additional activity, as unedited. Another important market dynamic to watch as we move through 2021 will be the evolution of the decline curves in these shale wells. As we've discussed previously, after the flush production of the initial years, these wells move into more of a steady state environment as the curves flatten out. This lends stability to the need for compression in such situations where our equipment is required to keep those gas volumes moving. With the rig countdown significantly from recent highs and producers seemingly more focused on maintaining production levels rather than growing them meaningfully, we would expect to see a higher proportion of overall production in that flat, steady state part of the curve where decline has meaningfully slowed. For USA Compression, this plays right into our business strategy because we are focused on infrastructure applications that support these steady state operations. As the wells age, the natural gas volumes exhibit a very stable profile. We are also seeing that several of our customers are opting to maintain a flat production profile by installing additional compression rather than to drill additional wells or to complete DUCs. The main driver is to reduce capital expenditures and overall leverage that comes from additional drilling, and compression is a low-cost way for them to maintain production and offset decline. As the nature of the production is expected to exhibit much more stable characteristics, another critical dynamic in our business is a relationship between compression horsepower and declining reservoir pressure. As well as age and pressures decline, to move the same volume of gas requires an exponential increase in compression horsepower. So you can see that in order to maintain production, we will likely take more work, i.e., horsepower, to move the gas. So in all types of applications, even though gas volumes may be declining, the compression required may actually increase as pressures also decline. As we look ahead to a phase in the industry marked by less capital spending, we think our business model is one easily adaptable to the changes going on in the industry. We don't require large capital commitments on multi-year projects, but instead, Equipment that we already have in our fleet will be used to help our customers keep their gas volumes moving. We can easily shift from periods of growth to periods of stability, all while managing our balance sheet and maintaining strong operating margins. So turning to customer activity. As I've discussed in the past, we are a lagging indicator as it regards activity levels. Our overall activity pickup will typically lag activity further upstream by one or two quarters. Well, the rig count in the U.S. bottomed out in August of last year and has begun to tick up since that time. In August, the total rig count in the U.S. was off about 70% from its highs at the beginning of the year. By the end of 2020, it had rebounded more than 40% from the lows, and currently, the count has recovered about 60% off of the lows. So while we are still at about half of the pre-pandemic high of early 2020, where we stand today represents a solid improvement. Out of the total rig count, more than half are in the Permian, which is clearly supporting those gas volume numbers I mentioned earlier. The Arkansas, Louisiana, East Texas area is second in rig count, followed closely by the Appalachian region. These three areas account for almost 80% of the lower 48 rig count, and we have a presence in all of these areas. During the quarter, we saw a very slight decrease in utilization, driven by some unit returns from customers. As we've discussed the last few quarters, Customers continue to evaluate their compression needs and try to anticipate what their 2021 needs might be. As such, some units will return, but overall, we considered utilization to be fairly flat quarter over quarter, which is what we expected. Looking forward, we are optimistic that because of the nature of applications for our assets, dry gas activities and natural gas handling activities, like those at gas processing plants or large volume centralized gas lift applications, that our assets are likely to stay out in the field. Adding to this stability, our contract portfolio continues to lend stability to our operations with month-to-month contracts comprising only about 30% of the fleet. So to summarize, while we are no means out of the woods, things are looking better. The business is stabilized with unit returns significantly slowing and customer dialogue picking up. The cost-cutting actions we took in early 2020 and restraint on capital spending have helped throughout the year, and so we feel positioned, very well positioned, as we enter 2021 and certainly not playing catch-up in any way. That said, we successfully powered through what, frankly, is the worst downturn I have seen in my over 40 years in the energy industry. We have emerged stronger, leaner, and poised to ramp revenues by deploying our idle fleet over the upcoming quarters. While we wait for the market to turn upward again, we will continue to manage what we can control. We believe our focus on large horsepower, multi-unit, centralized compressor stations over the recent years will further bolster the stability that we have seen. As natural gas demand stays resilient as it is expected to be, We expect the demand to require continued investment and, along with it, continued natural gas compression services. I will now turn the call over to Matt to walk through some of the financial highlights of the quarter. Matt?